it is a both yes and/or no question, the answer is depending on you to decide and choose. Some of us have grown and developed themselves and their company by using all facilities provided under the account name of liabilities and stop at some points, another bunch of us still using it until now, make an abundant achievement but also we can not turn our face to them who was falling apart because of miss managed the leverage.
And before we all go through this topic, nowadays, there are so many discussions on social media platforms, mentioning how big is our country's debt, without any judgment and prejudice, let us go back to the basic equation of accounting, which is:
Asset = Equity + Liabilities
Liabilities here can mean anything indebted, it can be our delayed obligation to the government in a form of tax bills, it might be a short term loan from banks or non-bank financial institution related to our capital expenditure expansion (e.g. car installment), also a trust from our vendor that sends our requirement of raw material without any down payment.
It can also stand for fresh funds loaned by a third party to the company, either in short term or long term. If it is in short term, meaning that it is due under one year period, and long term meaning that it is due more than one year.
Equity stands for the amount that represents the shareholders' stake in the company, identified on a company's balance sheet, usually, it shows how much money put by all the founders of the company at the beginning of it. It is periodically added with retained earning that is converted to additional paid-in capital and also can be calculated directly by subtracting asset with liabilities.
While the asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.
So, if you are taking a look at one's debt/liabilities, It can not be only on one side, you have to check on the other side, which is an asset. It has to be balanced in any way. and that is what it is.
Now, let us discuss the role of leverage in a company's growth. I will not share something related to KYC or 5C principles of due diligence, this is something that I am sure you can find everywhere through the net, and that is done by the creditor to us as the debtor, let's discuss this on the other way around.
a) How can you actually increase your business with the leverage, it is not that easy, but also not that difficult,
One; you should define what is your company's assets and expenditures requirement to grow, for example: do you need a new building or do you need a new server? and do you need a caretaker or janitor to take care of this new building or instead, you just need a hyper-care engineer to take care of your server?
Two: Be very careful with your routine cost and bills, always maintain a 'cost-cutting mindset within your behavior (I will have another article especially discussing cost-cutting until the edge). three; hopefully, you really understand about your company and where will it go in the future (is it conventional-traditional or is it robustly grown digital company, always remember, "easy come and easy go".
Three; Actually it is related to the point above, always look at the 'interest' section, is it p.a (per annual)? fixed-rate? floating-rate? or others? Always ask for simulation and go back to your financial estimations, does it make any sense?.
Four; Always take a look at your financial ratios, nowadays, many software and apps, not to be mentioned conventional accountant, are capable to provide these ratios periodically and this fourth reason will be explained later in another article about Leverage Ratios.
Five; Clearly, you got to have a revenue, no revenue no repayment to creditors, all asset has to be used effectively and efficiently to create revenue in any way legal and possible. Unless you have a fixed potential market to be served, it is fine to have a gross period as relaxation, while you finish all the asset development necessary, when it is not, then read the bottom of this article.
b) How can you select your creditor (so it is the other way around, as a debtor/lessor, I think that we also have a right to choose the best creditor for us).
Maybe you will ask me, " why should I be bothered about this?, as long as my proposal and requirement got accepted, it is a done deal, why should I waste more time to check on our creditors?".
Well, it does matter.
One; Strong persistent creditor will maintain their promises as written in the agreement and vice versa, they will ask the same from you. As they are concerned so much about your capability of repayment, they will monitor you periodically, provide you with some suggestions, and in some cases, a really strong and perfect way out of your non-financial problems (which is actually related, because it is all about revenue, right?).
Two; being watched and monitored make you always be careful and sensitive to all threatening condition to the company, it makes you always prepared and provide all preventive and curative ways systematically.
Three; strong financial institutions tend to provide a helpful support system for their customer, it guarantees your repayment to them. This system will help you in checking out your financial estimation and business model with all related premises and assumptions, it will minimize damage cost if something bad might happen.
Four; There is no such thing as a free lunch, there is no way a debtor can get an easy loan, there is always a catch in it, either high-interest rates, fast repayment lead time, big asset as a guarantee, or in some cases, really bad motives like money laundry, fraud and fraud cover-up. (fraud cover-up, it will be explained in another article, hopefully soon)
OK, now we know pretty much about how to check on our creditor and we go back to square one, can we do this without any loan? yes of course we can. This time now is the new era of digital marketing, artificial intelligence, automation, robotic, SEO, SEM. It is the era of Google, Instagram, Twitter, Tiktok, Snapchat, clubhouse, even Facebook felt a little bit old now.
Price to user ratios becoming an interesting parameter for declaring a company's value, basically, it depends on how many people connected with you, like you, follow you or in any way related to you, as this is a potential market for your product or any other product you can sell to them. The challenge is so many, but it is doable if you know how to all the things mentioned as a new era tools above. Another thing is that it should be built organically as it has to change people's mindset about your business. Are you already in it?? it is up to you to run this and walk through this?
Last but not least, like promised above, What if you are stranded and trapped in a debt-trap?? you already took the loan but no revenue is coming? Does the interest keep adding as the due date is closing? wow, it doesn't feel good right?
Calm down, take one step back, take a deep breath and:
So, leverage, needed or not, it actually depends on every situation, so decide wisely
#easybensin #financialmanagement #accounting #choosewisely